A hotpotch of worry

It's rare that I post something related to work, but today, the news in the financial markets, and in particular the US has been shocking. The collapse of Lehman Brothers, after 158 years in the making, and the acquisition of Merrill Lynch by Bank of America amounting to a staggering US$50 billion after only a purported 48 hours of negotiation simply boggles the mind.

Of course, financial markets are reeling with the effects, and one can only imagine what is next. As AIG, the world's largest insurance company scrambles to raise capital amidst a potential downgrade in credit ratings which will have serious knock-on repercussions, the sheer thought of how many more such stories will surface following the turmoil in housing and credit markets is pretty scary.

And you know what? Just a few years back, many financial trainers were teaching agents that there is minimal risk in fixed income, that the main risk lies with equity, which is sort of true in terms of price or market risk, but given the quantum leap in financial engineering and the development of the accounting standards to include marked-to-market of securities, both price and credit risk have become of extreme importance in the fixed income market. At least 3 years back, we have gone on roadshows around the country to educate agents on what is fixed income and that it is incorrect to associate fixed income with no or minimal risk.

The rise in any bubbles will one day be pricked. Amidst the hot sales of structured products these days, with many unfamiliar with the underlying risks and the hidden costs, the lure of high returns and capital protection seems too good to be true. Back testing of data shows wonderful historical returns, and though there are disclaimer clauses in the various leaflets or documents, it is usually mentioned that the past is no predictor of the future. But you may say that no matter what, the principle is protected? Well, it is only protected to the extent of the financial health and on-going concern of the the party or institution providing that guarantee (and usually at a cost I might add). Then again, I am in the insurance line, and the sale of insurance products depends on the certainty of payment, which will again depend on the well being of the company involved. Not that I am implying or speculating about any specific institution of course.

Yes, we have regulators and watch dogs, auditors and what nots, but really, risk appetite and risk controls depend on the human factor. At the end of the day, how one chooses to take on risk and what controls are put in place depend on the willingness to implement. However, such controls or lack of controls, are caused mainly by human resource contraints or issues.

Tomorrow, a few of us have a session with the regulator who requested for a presentation on our activities, our risk appetite, our controls, our monitoring programme and our reporting lines and oversight function, and to specifically dwell on communication within the organisation. I guess they are targeting the bigger institutions first to generally see the operational and financial controls in existence, before perhaps implementing such on the smaller market players.

Anyway, back to the topic at hand, I have sort of felt detached over the past year or so after hearing about writedowns and losses being incurred by various institutions, particularly in the US and the European markets. It is worrying to think how much of such exposure lies in the Asian markets. But today was an exception, I felt shock and horror over the Lehman news, maybe because the company I work for recently crossed its centennial mark. To have such history, and being one of the top players in the investment banking market to collapse sends shivers down my spine. Now, I personally don't know anyone in Lehman Brothers, but the sheer thought of the potential loss of jobs and income security by many following the credit markets crisis is scary indeed. Have they saved enough to ride out the bad times? For me, worrying is one thing, and being affected emotionally is another, but this time, I sort of feel both, which I cannot carry on brooding for long. Was quite caught up with the news, but concluded that I will focus on my little pond, or perhaps my little fish tank, to improve the operational matters, to look after the well being of the portfolios under my care, as well as the general well being of the staff in the team.

Just to digress a little, since this has been on my mind for a while, in our country, the various negative news on the political front and the injustice of various parties echo the sentiment of double standards and "a subtle persecution". As one ages, greater awareness abounds, and it is such that the understanding and the feeling of "hang on, that's not right!" permeates through the very air we breathe. Dare I draw parallels to the atrocities of the second world war? But that was a case of open persecution, whereas here, it is more a progressive splintering of ones values and pulling wool over one's eyes. Yet, this is the country I would call home.